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According to preliminary results from the teardown analysis conducted by IHS, the Xbox One carries a bill of materials (BOM) of $457; manufacturing is estimated at $14, which means the console’s total cost of $471 is only $28 less than the retail price of $499. Theoretically, this means that Microsoft is subsidizing the cost of the video game console at the time of launch. This is very similar to the new PlayStation 4 from Sony Corp., which carries a hardware and manufacturing cost of only $18 lower than its retail price, according to the preliminary IHS teardown information released last week. Just like the PlayStation 4, Microsoft initially will take a loss on each Xbox One sold when other expenses are added into the equation.
“For both Microsoft and Sony, their latest-generation video game console hardware is unprofitable at the time of release, requiring the companies to subsidize it initially. However, these companies easily can largely compensate for their losses though sales of highly lucrative game titles. Meanwhile, as the cost to produce the consoles decreases according to the normal learning-curve dynamics in the electronics industry, the companies can cut their retail pricing—or pad their profits. Over time, Microsoft is likely to reduce the retail price of the Xbox One in order to maintain sales momentum,” said Steve Mather, senior principal analyst for IHS.
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